Measuring Consumer Uncertainty about Future Inflation

40 Pages Posted: 21 Dec 2009

See all articles by Wändi Bruine de Bruin

Wändi Bruine de Bruin

Carnegie Mellon University

Charles F. Manski

Northwestern University - Department of Economics; National Bureau of Economic Research (NBER)

Giorgio Topa

Federal Reserve Bank of New York

Wilbert van der Klaauw

Federal Reserve Bank of New York; IZA

Date Written: December 1, 2009

Abstract

Survey measures of consumer inflation expectations have an important shortcoming in that, while providing useful summary measures of the distribution of point forecasts across individuals, they contain no direct information about an individual’s uncertainty about future inflation. The latter is important not only for forecasting inflation and other macroeconomic outcomes, but also for assessing a central bank’s credibility and effectiveness of communication. This paper explores the feasibility of eliciting individual consumers’ subjective probability distributions of future inflation outcomes.

In November 2007, we began administering web-based surveys to participants in RAND’s American Life Panel. In addition to their point predictions, respondents were asked for their subjective assessments of the percentage chance that inflation will fall in each of several predetermined intervals. We find that our measures of individual forecast densities and uncertainty are internally consistent and reliable. Those who are more uncertain about year-ahead price inflation are also generally more uncertain about longer term price inflation and future wage changes. We find also that participants expressing higher uncertainty in their density forecasts make larger revisions to their point forecasts over time. Measures of central tendency derived from individual density forecasts are highly correlated with point forecasts, but they usually differ, often substantially, at the individual level.

Finally, we relate our direct measure of aggregate consumer uncertainty to a more conventional approach that uses disagreement among individual forecasters, as seen in the dispersion of their point forecasts, as a proxy for forecast uncertainty. Although the two measures are positively correlated, our results suggest that disagreement and uncertainty are distinct concepts, both relevant to the analysis of inflation expectations.

Keywords: inflation expectations, forecast uncertainty, wage expectations, probabilistic survey questions

JEL Classification: E52, D12, C81

Suggested Citation

Bruine de Bruin, Wändi and Manski, Charles F. and Topa, Giorgio and van der Klaauw, H. Wilbert, Measuring Consumer Uncertainty about Future Inflation (December 1, 2009). FRB of New York Staff Report No. 415. Available at SSRN: https://ssrn.com/abstract=1525643 or http://dx.doi.org/10.2139/ssrn.1525643

Wändi Bruine de Bruin

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

Charles F. Manski

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States
847-491-8223 (Phone)
847-491-7001 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Giorgio Topa (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

H. Wilbert Van der Klaauw

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5916 (Phone)
212-720-1844 (Fax)

IZA ( email )

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